In presentations regarding trading psychology and why traders find it so hard to be profitable, I often refer to a paper titled An analysis of the profiles and motivations of habitual commodity speculators by W. Bruce Canoles, Sarahelen Thompson, Scott Irwin Virginia, Grace France (Journal of Futures Markets Volume 18 Issue 7 October 1998)
This study showed something very interesting about trader motivations and I have added my own emphasis to the points below –
This trader does not consider preservation of his commodity capital to be a very high trading priority. As a result, he rarely uses stop loss orders. He wins more frequently than he loses (over 51% of the time) but is an overall net loser in dollar terms. In spite of recurring trading losses, he has never made any substantial change in his basic trading style. To this trader, whether he won or lost on a particular trade is more important than the size of the win or loss. Thus he consistently cuts his profits short while letting his losses run. He also worries more about missing a move in the market by being on the sidelines than about losing by being on the wrong side of a market move; that is, being in the action is more important than the financial consequences. Participating brokers confirmed that for the majority of the speculators studied, the primary motivation for continuous trading is the recreational utility derived largely from having a market position
To summarise what was found is that the majority of traders trade for entertainment they do not trade to be profitable and I believe this finding is universal.
The reason I consider this finding to be universal is based upon decades of observation that is continually reinforced by emails such as the one below which dropped today regarding the nature of rules-based trading that we practice.
Maybe this style of trading doesn’t suit everyone. It’s so automatic that it just bores me to tears. Every time I go to open it up all my energy just vanishes and I just close it up again. Sorry I know this sounds a bit dramatic. The thing is I love trading on the stock market. I don’t want it to be on automatic. I like getting all excited about it.
Trust me you are doing it wrong…….